Taxation (International And Other Provisions) Bill - continued          House of Commons

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Section 809BZE: Deemed interest if borrower is a partnership

1133.     This section allows income tax relief to be given if there is a type 1 finance arrangement and the borrower is a partnership. It is based on section 774B(5) to (8) of ICTA. It has a similar structure to section 809BZD; see the commentary on that section.

Section 809BZF: Type 2 finance arrangement defined

1134.     This section defines a form of arrangement, labelled a “type 2 finance arrangement”, which falls within this legislation. It is based on section 774C(1) to (3) of ICTA.

1135.     A type 2 finance arrangement works like this.

  • Under the arrangement, a transferor disposes of an asset to a partnership.

  • This partnership is one of which the transferor is a member immediately after that disposal - it does not matter whether it was a partner before the disposal.

  • The partnership receives an advance from a lender.

  • The accounts of the partnership record in accordance with GAAP for that period a financial liability in respect of the advance.

  • There is a “relevant change” in relation to the partnership. Broadly speaking, a “relevant change” affects the lender. Either the lender (or a person connected with the lender) becomes a member of the partnership, or else there is a change in the profit share of the lender (or of a person connected with the lender). See section 809BZG.

  • The share of the lender (or other person involved in the relevant change) in the profits of the partnership is determined (wholly or partly) by reference to payments in respect of the asset disposed of.

  • In accordance with GAAP the payments reduce the amount of the financial liability.

1136.     The lender’s advance is thus made in the form of a contribution to the partnership and its profit share is such that payments are made to it which repay that contribution together with interest. Once the repayment with interest has been made it is likely that there are arrangements under which the lender ceases to be a member of the partnership or to share in the profits of it.

1137.     If the relevant change would (but for section 809BZH) have the “relevant effect” (as defined in subsection (3) of that section), then that section negates the relevant effect.

1138.     Subsection (1) provides that two conditions must be met if an arrangement is to be a type 2 finance arrangement.

1139.     Subsection (2) specifies condition A, which concerns the terms of the arrangement. There are five tests in condition A, all of which must be passed if the condition is to be met.

1140.     Subsection (3) specifies condition B, which is about accounting. To summarise, the payments mentioned in subsection (2)(e) must be, for accounting purposes, payments of principal rather than interest.

Section 809BZG: Relevant change in relation to partnership

1141.     This section defines “relevant change”. It is based on section 774C(2), (4), (6) and (7) of ICTA.

1142.     This section applies for the purposes of this Chapter and, therefore, is used in defining both “type 2 finance arrangement” and “type 3 finance arrangement”. See sections 809BZF(2)(d) and 809BZJ(2)(c).

1143.     Subsection (5) defines “person involved in a relevant change” for the purposes of this Chapter.

Section 809BZH: Certain tax consequences not to have effect

1144.     This section disapplies certain tax consequences of a type 2 finance arrangement if certain conditions are met. It is based on sections 774D(1) to (4) and 774G(2) of ICTA.

1145.     Under subsections (1) and (2), if - but for this section - a relevant change in relation to the partnership would have the “relevant effect”, then it does not.

1146.     Subsection (3) defines the “relevant effect”. It specifies three alternative effects.

Section 809BZI: Deemed interest

1147.     This section allows income tax relief to be given if there is a type 2 finance arrangement. It is based on section 774D(6), (8), (12) and (13) of ICTA.

1148.     Subsection (1) lays down the conditions for this section to apply and introduces the person (namely, the transferor) eligible for income tax relief.

1149.     Subsection (2) permits the transferor to treat the amount mentioned in subsection (1)(c) as interest payable on a loan. If the relevant statutory conditions are met, the deemed interest qualifies for income tax relief under Chapter 1 of Part 8 of ITA.

1150.     Subsection (3) extends subsection (1)(c) to cover the case in which the transferor prepares accounts which, in accordance with GAAP, record an amount as a finance charge in respect of the advance (even though the partnership does not).

1151.     If subsection (2) deems there to be interest payable, subsection (4) determines when it is deemed to be paid.

Section 809BZJ: Type 3 finance arrangement defined

1152.     This section defines a form of arrangement, labelled a “type 3 finance arrangement”, which falls within this legislation. It is based on section 774C(1), (4) and (5) of ICTA.

1153.     A type 3 finance arrangement is similar to a type 2 finance arrangement. See the commentary on section 809BZF. But a type 3 finance arrangement deals with a case where an existing partnership enters into an arrangement under which the lender becomes a partner and shares in the profits to an extent sufficient to repay its contribution with interest. It differs from a type 2 finance arrangement in that (a) the partnership cannot be one formed for the purposes of the arrangement and (b) there is no reference to a transfer of an asset or a transferor.

1154.     Subsection (1) provides that two conditions must be met if an arrangement is to be a type 3 finance arrangement.

1155.     Subsection (2) specifies condition A, which concerns the terms of the arrangement. There are four tests in condition A, all of which must be passed if the condition is to be met.

1156.     Subsection (3) specifies condition B, which is about accounting. To summarise, the payments mentioned in subsection (2)(d) must be, for accounting purposes, payments of principal rather than interest.

1157.     Conditions A and B in this section are very similar to conditions A and B in section 809BZF (type 2 finance arrangement defined). For the provisions which differ, see sections 809BZF(2)(a) and (b) and 809BZJ(2)(a).

Section 809BZK: Certain tax consequences not to have effect

1158.     This section disapplies certain tax consequences of a type 3 finance arrangement if certain conditions are met. It is based on sections 774D(1) to (4) and 774G(2) of ICTA.

1159.     Under subsections (1) and (4), if - but for this section - a relevant change in relation to the partnership would have the “relevant effect”, then it does not.

1160.     Subsection (2) defines the “relevant effect”. It specifies three alternative effects. The “relevant effect” in subsection (2) is very similar to the “relevant effect” in section 681EF(3), which makes corresponding provision for type 2 finance arrangements. But the “relevant effect” in subsection (2) is an effect on a “relevant member” (as defined in subsection (3)), whereas the “relevant effect” in section 681EF(3) is an effect in relation to the transferor.

Section 809BZL: Deemed interest

1161.     This section allows income tax relief to be given if there is a type 3 finance arrangement. It is based on section 774D(3), (9) and (11) to (13) of ICTA.

1162.     Subsection (1) lays down the conditions for this section to apply and introduces the person (namely, a relevant member, as defined in subsection (5)) eligible for income tax relief.

1163.     Subsection (2) permits the relevant member to treat the amount mentioned in subsection (1)(c) as interest payable on a loan. If the relevant statutory conditions are met, the deemed interest qualifies for income tax relief under Chapter 1 of Part 8 of ITA.

1164.     Subsection (3) extends subsection (1)(c) to cover the case in which a relevant member prepares accounts which, in accordance with GAAP, record an amount as a finance charge in respect of the advance (even though the partnership does not). This relevant member need not be the relevant member mentioned in subsection (2).

1165.     If subsection (2) deems there to be interest payable, subsection (4) determines when it is deemed to be paid.

Section 809BZM: Exceptions: preliminary

1166.     This section introduces a group of sections which make exceptions to sections 809BZA to 809BZL. It is new.

Section 809BZN: Exceptions

1167.     This section specifies exceptions to sections 809BZA to 809BZL. It is based on section 774E(1) to (6) of ICTA.

1168.     Subsection (6) refers to Part 10A of ITA (alternative finance arrangements), which is inserted by Schedule 2 to this Bill and is based on Chapter 5 of Part 2 of FA 2005.

Section 809BZO: Exceptions: relevant person

1169.     This section defines “relevant person” for the purposes of section 809BZN. It is based on section 774E(7) of ICTA.

1170.     Section 774E of ICTA contains priority rules which prevent sections 774B and 774D of ICTA applying if other tax enactments apply. The definition of “relevant person” in section 774E(7) of ICTA interprets the references to a relevant person in section 774E(1) and (3) of ICTA. The wider the meaning of “relevant person”, the more likely it is that section 774E(1) and (3) of ICTA disapply the anti-avoidance rules in sections 774B and 774D of ICTA.

1171.     The only possibly uncertain element of the meaning of “relevant person” is the reference to a person connected with the borrower. Section 774G(4) of ICTA provides that the definition of “connected” in section 839 of ICTA applies “for the purposes of sections 774A to 774D”. It is not clear whether the use of “connected” in section 774E(7) of ICTA can be said to be “for the purposes of sections 774A to 774D”. But it is at any rate clear that section 774E only operates effectively as a priority rule if, at the very least, the reference in section 774E(7) of ICTA to persons connected with the borrower includes all persons who as a result of section 839 of ICTA would be treated as connected to the borrower.

1172.     Whether the reference goes (or needs to go) wider than that group is open to argument. The inclusive definition in subsection (5) preserves the scope for making that argument while giving the maximum possible certainty.

Section 809BZP: Power to make further exceptions

1173.     This section enables the Treasury to make further exceptions to sections 809BZA to 809BZL. It is based on section 774F of ICTA.

Sections 809BZQ to 809BZS: Accounts; arrangements; assets

1174.     These interpretative sections are based on section 774G(1), (3) and (5) to (6) of ICTA.

Chapter 5C: Loan or credit transactions

Overview

1175.     This Chapter is based on section 786 of ICTA. It corresponds to Chapter 3 of Part 16 of CTB2, which makes similar provision for corporation tax. It deals with certain loan or credit transactions.

Section 809CZA: Loan or credit transaction defined

1176.     This section defines “loan or credit transaction” for the purposes of sections 681FF and 681FG. It is based on section 786(1) and (2) of ICTA.

1177.     What is now section 786 of ICTA originally appeared as paragraph 12 of Schedule 13 to FA 1969. It is aimed at artificial arrangements for dressing up payments of interest in another form - for example, arrangements whereby X grants Y an interest-free loan and:

  • Y grants X an annuity while the loan is outstanding; or

  • Y transfers income-bearing assets to X on the understanding that X will return them when the loan is paid off.

1178.     Subsection (1) states the scope of the definition.

1179.     Subsections (2) and (3) focus on, respectively, the lending of money and the giving of credit.

1180.     Subsections (4) and (5) supplement subsections (2) and (3) respectively.

Section 809CZB: Certain payments treated as yearly interest

1181.     This section deems annual payments under loan or credit transactions to be yearly interest. It is based on section 786(3) and (3A) of ICTA.

Section 809CZC: Tax charged on income transferred

1182.     This section imposes a charge to income tax in certain cases in which, under a loan or credit transaction, a person transfers income arising from property without a sale or transfer of the property. It is based on section 786(5) to (7) of ICTA.

1183.     Subsection (1) states when this section applies.

1184.     Subsection (2) imposes the charge to income tax, quantifies the amount taxable, and specifies the person liable.

1185.     Subsections (3) to (7) are supplementary.

Schedule 6: UK representatives of non-UK residents

Overview

1186.     This Schedule inserts new Chapters 2B and 2C in Part 14 of ITA and new Part 7A in TCGA, rewriting sections 126 and 127 of, and Schedule 23 to, FA 1995. Those provisions determine who is a UK representative of a non-UK resident and set out the liabilities and obligations of a UK representative in respect of the assessment, collection and recovery of income tax and capital gains tax chargeable on the non-UK resident.

1187.     The new Chapter 2B of Part 14 of ITA rewrites sections 126 and 127 of FA 1995, so far as those sections determine whether a branch or agency in the United Kingdom through which a non-UK resident carries on a trade, profession or vocation is the UK representative of that non-UK resident in relation to the non-UK resident’s income from the trade, profession or vocation so carried on.

1188.     The new Chapter 2C of Part 14 of ITA rewrites Schedule 23 to FA 1995 so far as that Schedule imposes obligations on the UK representative in respect of the assessment, collection and recovery of income tax chargeable on the non-UK resident.

1189.     Chapter 1 of the new Part 7A of TCGA is concerned with a person who, in accordance with Chapter 2B of Part 14 of ITA, is the UK representative of a non-UK resident in relation to the income of the non-UK resident from a trade, profession or vocation carried on through a branch or agency in the United Kingdom. It provides that the same person is also the UK representative of the non-UK resident in relation to chargeable gains accruing to the non-UK resident on the disposal of such assets referred to in section 10 of TCGA as relate to the trade, profession or vocation so carried on or to the branch or agency.

1190.     Chapter 2 of the new Part 7A of TCGA rewrites Schedule 23 to FA 1995 so far as that Schedule imposes obligations on the UK representative in respect of the assessment, collection and recovery of capital gains tax chargeable on the non-UK resident under section 10 of TCGA.

Part 1: New Chapters 2B and 2C of Part 14 of ITA 2007

Chapter 2B: UK representative of non-UK resident

Overview

1191.     This new Chapter of Part 14 of ITA determines the extent to which and the period for which a branch or agency in the United Kingdom through which a non-UK resident carries on a trade, profession or vocation is the UK representative of the non-UK resident in relation to the non-UK resident’s income from the trade, profession or vocation.

1192.     The Chapter does not apply if the non-UK resident is a company, except to the extent that the income accrues to the non-UK resident company in the capacity of trustee.

Section 835C: Overview of Chapter

1193.     This section introduces the Chapter and provides a signpost to Chapter 2C. It is new.

Section 835D: Income tax chargeable on company’s income: application

1194.     This section provides that the Chapter does not apply to income tax chargeable on a company otherwise than as a trustee. It is based on section 126(10) of FA 1995.

1195.     If a non-UK resident company trades in the United Kingdom through a permanent establishment here, it is chargeable to corporation tax on its “chargeable profits”. Section 19 of CTA 2009 defines “chargeable profits” as the trading income arising directly or indirectly through or from the permanent establishment and the other income and chargeable gains referred to in section 19(3) attributable to the permanent establishment in accordance with sections 20 to 32 of that Act.

1196.     Section 148 of, and Schedule 26 to, FA 2003, which determine what constitutes a permanent establishment of a company, are rewritten in Chapter 2 of Part 24 of CTB2. Section 150 of FA 2003, which imposes obligations and liabilities on a permanent establishment in the United Kingdom as the UK representative of the non-UK resident company in relation to the chargeable profits attributable to the permanent establishment, is rewritten in Chapter 6 of Part 22 of CTB2.

1197.     If a non-UK resident company is chargeable to tax in respect of any other income from a United Kingdom source, it is charged to income tax and its liability is limited in accordance with Chapter 1 of Part 14 of ITA. The extent to which the non-UK resident company is chargeable to tax in respect of such income may be limited by the terms of any applicable DTA. But in any event the non-UK resident company will not have a UK representative in relation to any of that income to which it is beneficially entitled.

Section 835E: Branch or agency treated as UK representative

1198.     This section provides that a branch or agency in the United Kingdom through which a non-UK resident carries on a trade, profession or vocation is the non-UK resident’s UK representative in relation to the amount of any income of the non-UK resident from the trade, profession or vocation arising through or from the branch or agency. It is based on section 126(2), (3), (4) and (5) of FA 1995.

1199.     Subsection (2) sets out the amounts of income of a non-UK resident in relation to which a branch or agent in the United Kingdom through which the non-UK resident carries on a trade, profession or vocation is the UK representative of the non-UK resident.

1200.     If a branch or agency in the United Kingdom of a non-UK resident ceases to be the non-UK resident’s branch or agency, the branch or agency nevertheless continues thereafter to be the UK representative of the non-UK resident in relation to the amounts of income of the non-UK resident mentioned in subsection (2). See Rule 2 in subsection (3).

1201.     Subsection (5) introduces sections 835G to 835K which provide exceptions to the general rule in subsection (2) that a branch or agency in the United Kingdom through which a non-UK resident carries on a trade, profession or vocation is the UK representative of the non-UK resident in relation to the amounts of income mentioned in subsection (2).

Section 835F: Trade or profession carried on in partnership

1202.     This section contains special rules to deal with the case where the non-UK resident carries on a trade or profession in partnership. It is based on section 126(6), (7) and (7A) of FA 1995.

1203.     Subsections (1) and (2) provide that, if a partnership carries on a trade or profession in the United Kingdom through a branch or agency, the branch or agency is treated as the UK representative of any non-UK resident partner in relation to that partner’s share of the United Kingdom profits.

1204.     Subsections (3) and (4) provide that section 835E also applies if a partnership which includes both UK resident and non-UK resident members carries on a trade or profession in the United Kingdom, whether it does so itself or through a branch or agency.

1205.     In this case, the partnership itself is treated as the UK representative of the non-UK resident partner in relation to that partner’s share of the United Kingdom profits, notwithstanding that there may also be a branch or agency which is the non-UK resident partner’s UK representative in respect of those profits. All the partners are as a consequence jointly liable for tax on the non-UK resident partner’s share of the United Kingdom profits.

Section 835G: Agents

1206.     This section provides that an agent in the United Kingdom who, when carrying out a transaction on behalf of a non-UK resident, does not act in the course of a regular agency for the non-UK resident is not the UK representative of the non-UK resident in respect of income of the non-UK resident arising from or as a result of the transaction. It is based on section 127(1) and (15) of FA 1995.

Section 835H: Brokers

1207.     This section sets out the circumstances in which and the extent to which a broker in the United Kingdom through whom a non-UK resident carries on business is not the UK representative of the non-UK resident in respect of income of the non-UK resident arising from or as a result of transactions carried out through the broker. It is based on section 127(1), (2) and (15) of FA 1995.

1208.     Subsection (2)(b) provides that the only circumstances in which the broker will not be a UK representative in respect of the income arising from or as a result of such a transaction is if the independent broker conditions in section 835L are met in relation to the transaction. See the commentary on section 835L.

Section 835I: Investment managers

1209.     This section sets out the circumstances in which and the extent to which an investment manager in the United Kingdom through whom a non-UK resident carries on business is not the UK representative of the non-UK resident in respect of income of the non-UK resident arising from or as a result of transactions carried out through the investment manager. It is based on section 127(1), (3) and (15) of FA 1995.

1210.     Subsection (2) provides that the only circumstances in which the investment manager will not be a UK representative in respect of the income arising from or as a result of such a transaction is if the transaction is an investment transaction and the independent investment manager conditions in section 835M are met in relation to the transaction. See the commentary on section 835M.

1211.     “Investment manager” and “investment transaction” are defined in section 835S.

Section 835J: Persons acting under alternative finance arrangements

1212.     This section provides that, if a non-UK resident is party to certain alternative finance arrangements, neither the counter-party to the arrangements nor any other person acting for the non-UK resident in relation to the arrangements is the UK representative in respect of amounts within section 835E(2) which consist of the non-UK resident’s alternative finance return. It is based on section 127(1) of FA 1995.

 
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Prepared: 19 November 2009